If the current rate of decarbonization persists the downward correction in global equity valuation could be as severe as 40%, according to a paper published by French academic think tank EDHEC Risk Climate Impact Institute.
EDHEC also noted that this number was a result of a relatively conservative modelling approach. However, if a “more robust” debcarbonization approach were to be taken worldwide, there could instead be only a 5-10% downward correction in global equity valuation.
The report noted that as regulation inspired by the recommendations of the Taskforce for Climate-related Financial Disclosures is being phased in across the world, more companies and financial institutions are performing forward-looking assessments of their exposure to the potential impacts of climate change.
Central to these assessments is the analysis of how businesses and portfolios would be impacted in alternative states of the world. Compliance with TCFD recommendations requires disclosure of impacts in a Paris Agreement aligned maximum of 1.5°C global warming scenario, versus a “business-as-usual,” higher emission scenario.
The paper took into account both transition and physical risk, without judging whether one or the other should be more important for equity valuation.
